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Joint Ventures between Russian and American Companies

The reason the very large companies are willing to take at least some risk on the outcome of Russia's experiment with political democracy and free markets is the enormous size of the potential Russian market. To take only one example, Russia with 150 million consumers produces only 13 million cars (Turin, 1998, March 7, p. 65). Secondly, by international standards, assets in Russia are incredibly cheap. When the top 500 Russian companies were privatized in 1993, they were sold for prices which were 1/1000 of comparably sized American companies (Psst!, 1994, Nov. 5, p. 64). In 1995, the market capitalization of Russia's leading oil companies divided by their oil output came to only $3.50 a barrel, while the Western oil majors were valued a $60 a barrel. The Russian market for consumer goods has been very slow to develop. Since 1991, actual output of consumer goods is only half of what it was under communism (Please, 1996, April 13, p. 57).

Joint ventures are commonly used to reduce the political risks of entering the Russian market which are exceptionally high. In their study of Western European joint ventures in Russia, Arino et al concluded that "investing in Russia involves significant country risk, mainly because of political instability, lack of infrastructure, lack of laws governing and protecting business interests, and difficulties in obtaining supplies and raw materials . . . considerable . . . cultural, political and economic differences" (1997, Spring, p. 19). In their book, Yergin and Gufstafson posit two different scenarios in the year 2010. In one, Russia makes a successful transition to a market economy, integrates its own economy with that of the global economy and achieves an economic miracle or chudo. In the other Russia retreats into economic and political nationalism and resumes an imperialistic stance vis-a-vis its neighbors. During the first decade after the collapse of communism, Russia faced a huge shortfall i...